Gold traders most bearish in 22 weeks on Fed tapering prospects

The U.S. Comex gold futures (COMEX:GCZ13) lost 2.35% in the past two days and ended at $1,243.60 on Thursday, a level last seen in early July. The gold futures troughed this year on June 28 when the prices touched $1,179.40. The U.S. Dollar Index (NYBOT:DXZ13) traded up to 81.112 on Wednesday and was up about 0.45% in the past two days. The S&P 500 Index and the Euro Stoxx 50 Index were down 0.09% and 0.33% respectively week-to-date. The U.S. 10-year government bond (CBOT:ZNZ13) yield climbed 8bp to 2.7842% on Thursday.

FOMC Minutes Sparked the Gold Sell-off

Gold prices reacted negatively to the latest FOMC minutes, which showed that the governors discussed various scenarios to wind down the QE program and left open the possibility of tapering in December, depending on the data. Despite the long discussions, the governors have neither decided on the best path of forward guidance on the near-zero interest rates nor a change in the unemployment threshold of 6.5%. The latest weekly jobless claims dropped to 323,000 compared to a median forecast of 335,000. The U.S. retail sales jumped 0.4% in October against an expectation of 0.1%, the highest rise in three months. While the U.S. debates the timing of QE tapering, Europe and Japan continue to combat disinflation and show no slowdown in their monetary expansion. The ECB could engage in unconventional monetary policies such as negative interest rates.

Investors Positioning

Gold-backed ETP investors sold 76 tons this month and 826 tons this year according to Bloomberg. The largest holder of the SPDR Gold Trust, John Paulson, also suggested that he would not add more bets to gold because he does not see inflation accelerating. Traders have become the most bearish on gold prices for next week since June 21. However, as FT's Lex pointed out, should the Fed be able to find ways to dampen the market volatility when it exits QE, the gold market should calm down, and the gold price as well as the gold stocks should do better.

What to Watch

We will watch the U.S. September/October housing starts and the November consumer confidence index on Nov. 26 as well as the November unemployment change in Germany, the October Japan CPI and the October Japan industrial production on Nov. 28.